“For our final question, we’d like to ask you all about the future…”
The four economists, comfortably seated around the wooden table, stiffen as they already anticipate what question will follow.
“What are your predictions for the housing market in the next 5 years?”
A long, slightly awkward pause of silence follows.
“If I’m being 100 percent honest,” one brave soul responds, “my prediction for the housing market is I don’t know what’s going to happen.”
I don’t know may be the hardest words to say in the English language, as the authors of Freakonomics point out. But business experts who have studied the housing market know enough to realize what they can’t know.
The notes in front of them—line graphs of sales growth and newspaper articles about economic recovery— can’t tell the whole story.
You know the saying “all politics is local”? It’s pretty much the same in the housing market, and that makes it different for everyone.
It’s a matter of smaller markets — the house being sold across the street or down the block — making up the housing market for one single area. Repeat that local market countless times and you have the hodgepodge of what’s known as the national housing market.
But a single market can change drastically at any given moment, so where does that leave national housing trends?
Harry Truman once famously asked for a “one armed economist,” because economists were always providing opinions by stating “on one hand…” followed by “well, on the other hand...”
Maybe one day we will have a one-armed approach to solving the housing market. Until then, we will continue into the future of real estate uncertainty.
Four economists and researchers from Marquette University’s College of Business Administration sat down for a panel discussion of the housing market — where it is, where it has been and where it’s going. Each brought a different perspective based on his own interests and research.
Dr. David Clark is a professor of economics, having previously worked as a consultant for private and government agencies. For 13 years he’s worked with the Wisconsin REALTORS® Association to analyze and release monthly housing reports.
Dr. Andrew Hanson, associate professor of economics, has research interests in public finance, urban economics and spatial economics. He has served as a staff economist for the Council of Economic Advisers in Washington D.C.
Dr. Mark Eppli, interim Keyes Dean of Business Administration, is a professor of finance and the Bell Chair in Real Estate. He has consulted a number of finance, real estate and government organizations, and has been widely published in a range of commercial real estate topics.
Dr. Anthony Pennington-Cross, or APC as he’s commonly called, serves as chair of the finance department. His most recent research focuses on subprime lending in the housing market, house price dynamics, commercial property and other urban and real estate issues.
The following are excerpts of their discussion surrounding the housing market. Responses have been edited.
What has changed since the housing market crash?
David Clark: Certainly home sales have been relatively strong since they hit bottom, especially here [Wisconsin]. One of the things to keep in mind is that Wisconsin’s home market is not really that volatile. If you look at housing price movements in places like California, Arizona, Nevada and Florida they dropped rather substantially. Arizona and California dropped roughly 50 percent from the peak sales price to the trough. On the other hand, Wisconsin fell around 13 percent. The last five months have been a challenge and part of that has to do with the weather. So we’re at an interesting juncture, and it may be an aberration, but sales are down 8 percent on a year-to-date basis through May.
Anthony Pennington-Cross: The mortgage market isn’t the same. The standards for people to get loans are tighter than they were before and there’s a new system of what types of loans require banks to hold capital or to hold less capital. Then we have a lot of unknowns in where the mortgages are going to come from in the future. The government is running Fannie Mae and Freddie Mac and there’s a lot of political uncertainty about what’s going to happen to them. Will they become private? If they do, what will their structures be?
Mark Eppli: I look at it from existing and new home buyers entering the market. Existing home buyers have virtually all refinanced and have very low interest rates right now. Then if you look at first-time home buyers we’ve seen a drop off. Historically just over 40 percent of sales were to first-time buyers, but the most recent numbers are at 29 percent. When you look at what is preventing that first-time home buyer, we’re seeing it’s the mortgage market. Freddie Mac and Fannie Mae have stepped up credit score requirements from 660 and 680 to something north of 720.
Is home owning really the best option for young people?
Eppli: The first-time home buyers are the young adult population generally. They have student loan debt, they have a weak job market and many of them are stepping from one job to the next, making credit more difficult to secure. Up until 2007, owning a home was the American Dream. Since 2007 it’s been the American nightmare.
Pennington-Cross: I would argue that young people should not own a home, and they should not have owned a home in 2002, in 2004 or in 2014. Houses are immobile and selling them costs a lot of money.
“Up until 2007, owning a home was the American Dream. Since 2007 it’s been the American nightmare.”
Andrew Hanson: Economists call it “housing lock,” meaning you don’t want to be locked into your house and your location. Imagine you’re going to get your first job somewhere, but maybe with a few years experience you want to be able to move. If you’re locked into a mortgage on a house that you can’t sell, then it restricts your mobility in the labor market.
Pennington-Cross: Even if house prices go up six percent in the two years I own the home, I’m probably going to lose money selling that house. It’s going to be a loss and I would’ve saved a lot of money just renting. There are legal fees to selling the house, and then there are things to fix that I maybe wouldn’t have fixed. The rule of thumb is if you’re not going to stay at least five years, you shouldn’t own a home.
Hanson: What contributes to that is the “user cost” of owning a house and people don’t always realize it. So you can compare your mortgage payment to your rent, but that payment is not the full cost of owning a house. You have to spend money on house maintenance, the structure is going to depreciate and you have to pay property taxes. All those things are costs that might not go into the check to the mortgage company. It might look like a good deal on paper, but if you add all of those in it might not be. Then you’re stuck with this house if you have other opportunities.
What can the average person look for to indicate a good time to buy?
Clark: Look at movement of prices. Once the movement of prices stops falling, plateaus and starts rising, that’s usually an indication that the housing market is improving. However, if you’re looking at housing prices that are going up two, three, four times the rate of inflation, that’s not sustainable and is an indication of moving toward the type of housing bubble that we saw in 2007 and in 2008.
Hanson: I would say don’t try and time the market. My advice to them would be think about your situation. How mobile do you want to be? What are the costs of renting versus the true cost of ownership? How much do I want rely on my house for my savings? Those are the kinds of things a person, not an investor, should be thinking about.
What can we do to prevent another housing meltdown?
Clark: We had Dodd-Frank that placed some new requirements on lenders and some of that is still being worked out. It increased down payment requirements. If those weren’t met, it required the banks that sold the mortgage to keep a portion of it, meaning they couldn’t sell it all to Freddie Mac or Fannie Mae. Today, that’s different. Now there is worry that the pendulum may have swung too far and it may keep some credit-worthy people out of housing. Certainly those changes were warranted, people were buying homes that had no business doing that between 2000 and 2006.
Hanson: The government spends a lot of money encouraging people to take on housing market debt rather than pay with more of a down payment. They do this through the tax deduction called the Mortgage Interest Deduction. So they spend about $100 billion a year giving people tax breaks when they take out a mortgage. It can save you a lot of money on your taxes, but it encourages people to take a bigger loan. Now if there’s a house price decline, suddenly the house is underwater very quickly because there’s little equity in the home. So I think if we were to change this policy, maybe it’ll discourage people from taking on so much debt.
Pennington-Cross: I think the vast majority of economists would say that interest deduction is a not a good policy tool and it should be phased out. Unfortunately, they’re not politicians, so the likelihood of this happening is fairly low. But it’s a big distortion in the market and it makes people buy bigger houses and also gives bigger price breaks to people who buy more expensive houses with bigger mortgages.
Predictions for the next five years?
Eppli: Where we are now is about at the real rate of return on a home. Also I look at the home ownership rate. Between 1997 and 2007, the homeownership rate went from about 64 percent to a little over 69 percent. We’re back down to 64 percent. So if you start looking over the coming year, we’ve gotten back to what I’d call approximately a normal market. However all real estate markets are local and, whether it’s Washington D.C. or San Francisco relative to northern Wisconsin, it goes to supply and demand. However, I’d say nationally we’re probably positioned well.
Clark: There’s some uncertainty right now as to what direction the economy is going. GDP growth in this quarter was actually down by one percent. We’ve had relatively solid monthly job reports lately, but a lot of those jobs are lower-income jobs. So there’s a lot of uncertainty in what the direction is going to be for the economy. It may be that, at least at the national level, some people are taking an attitude of: let me wait and see until the dust settles a little bit before I take this big step.
Hanson: That’s a really tough question. If you asked me what is going to happen to house prices on my block, I might say they’re going be stable. I may have a good grasp on that anecdotally, but even then I don’t really know. Maybe the next day they’re going to widen the highway and it’s going to run through my neighbor’s backyard. So I don’t know. When I blow that up on a national level, it’s even harder because the national housing market is made up of all those little housing markets that can change in different ways.
Pennington-Cross: When I look at a place in Milwaukee, I can see no reason for house prices to go up. I look at the fundamentals, people need jobs and they need to have enough money to be moving there. So, if you’re in a location where there’s no job growth and real income is not rising, it’s tough for me to think of prices increasing. Good things have to be happening in the economy for there to be house price growth and people also need to be able to get loans. So political pressure is building to make it easier to get loans again.
Research and reporting by Katie Miller and Wyatt Massey.